Austrian Economist’s take on Fiscal
Policy
Jill Student
Jack Deskoccupier
Dan Intheclouds
Joanie Willgraduatesoon
Austrian Economics
May Term 2015
Professor Hal Snarr
Westminster College
Austrian Economist’s take on Fiscal Policy
LRAS
PL
Doing nothing
in the short run
118
115
12
•
15
Y
Since u is too high, w is bid up by firms looking for scarce laborers
Austrian Economist’s take on Fiscal Policy
LRAS
PL
121
118
115
Doing nothing
in the short run
12
•
•
15
Y
Since u is too high, w is bid up by firms looking for scarce laborers
Since u is still too high, firms bid up the prices of other production inputs
Austrian Economist’s take on Fiscal Policy
LRAS
PL
118
115
•
•
•
Worrying about a
higher price level
Since u is too high, w is bid up by firms looking for scarce laborers
Since u is still too high, firms bid up the prices of other production inputs
To prevent prices from rising, the Fed raises interest rates just enough
Austrian Economist’s take on Fiscal Policy
LRAS
PL
Worrying about a
higher price level
118
115
105
11 12
•
•
•
15
Y
Since u is too high, w is bid up by firms looking for scarce laborers
Since u is still too high, firms bid up the prices of other production inputs
To prevent prices from rising, the Fed usually raises interest rates TOO MUCH
Austrian Economist’s take on Fiscal Policy
LRAS
PL
Doing nothing
over the long run
115
12
15
Y
In the absence of all government intervention, innovation is not inhibited by the Fed
hiking interest rates. Allowing low unemployment to persist
Austrian Economist’s take on Fiscal Policy
LRAS
PL
Doing nothing
over the long run
115
12
15
Y
In the absence of all government intervention, innovation is not inhibited by the Fed
hiking interest rates. Allowing low unemployment to persist
‒ drives cost-saving innovation
‒ firms employ individuals who find creative ways to lower costs
‒ Greater entrepreneurialism and technology raises LRAS
‒ u rises to just equal un as workers are replaced by labor-saving technologies